Related Articles

In addition to interest rates, credit score requirements and closing costs, the key thing you need to know before refinancing is your break-even point. This represents how soon you'll recuperate the costs you have to pay to refinance a mortgage. Keep reading for answers about this and other important questions regarding refinancing your home mortgage.

How Do I Calculate the Break-Even Point?

It only makes sense to refinance if the new loan will save you money or help you to achieve some other financial goal, such as paying off your mortgage faster. Since it is possible to lose money on a refinance, it's important to run a financial analysis of your break-even point, or how many months or years it will take to reach the point when the savings outweigh the costs of refinancing. To calculate the break-even point, divide the refinance costs by the savings on your monthly mortgage payment. For example, if the refinance will cost $3,000 and it reduces your monthly loan payment by $150, it will be 20 months before you break even. If plan to keep the mortgage for at least three years, then it may be worth refinancing. However, in this example, refinancing may not be attractive if you plan to move in two years.

How Much Are Closing Costs?

The closing costs and points, or lender's fees, can be considerable in a refinancing. Most lenders advise you to budget between 3 and 6 percent of the loan amount; on a $200,00 mortgage, that's at least $6,000. Some lenders will permit you to finance the closing costs, as long as the loan-to-valueratio – how much mortgage you have compared with what the property is worth – does not exceed the maximum permitted LTV for that loan product. Bear in mind that financing the closing costs means you will pay interest on them. This can increase the break-even point and the overall cost of your loan.

What Credit Score Do I Need?

Before refinancing, check your credit score to see if you qualify for the best rates. Some mortgage products, such as the FHA's streamline refinance program, don't have a minimum credit score requirement, but generally for other lenders, you'll need a score of at least 620 to qualify for a refinancing loan. Conventional lenders reserve their best rates for homeowners with scores of 740 or above.

Are There Other Requirements and Costs?

There are other factors that push up the cost of refinancing. For example, if you have less than 20 percent equity in your home, you may have to pay private mortgage insurance on top of your monthly mortgage payment. The added cost can negate the financial benefits of refinancing your home. You'll also need to satisfy other requirements, such as having a certain income level relative to debt. Most lenders will not consider your refinancing application if the total mortgage payment and all monthly payment obligations exceed 43 percent of your gross monthly income.

How Long Will It Take?

Once you have submitted the paperwork, the mortgage underwriter will begin the process of verifying your income, assets and other documents before approving the loan. During this process, you'll need an appraiser's valuation to make sure the lender is not lending more than the agreed loan-to-value ratio. A low appraisal can prevent you from being able to refinance, so it's important to complete repairs, make sure all amenities work and straighten up your home to show the property's value and the investment you have made in the home. Most refinances take between 30 and 45 days to complete, but some take considerably longer. If time is an issue, it's worth getting clarity on this point before you begin.

About the Author

Jayne Thompson earned an LLB in Law and Business Administration from the University of Birmingham and an LLM in International Law from the University of East London. She practiced real estate law in various “big law” firms before launching a career as a commercial writer. Her work has appeared on numerous property sites including Housemaster, For Rent and Active Rain. Find her at www.whiterosecopywriting.com.